Interpublic lease stands out among deals in submarket.

THE conversion of office buildings to condominiums remains the main theme in Hollywood and West Hollywood, but there was another development of note in the second quarter: the reversal of a year-long rise in office vacancy rates.

The Hollywood/West Hollywood vacancy rate in the April-June period fell to 20.8 percent from 21.9 percent in the first quarter, although it remains above the 19.8 percent recorded in the year-ago quarter, according to Grubb & Ellis Co.

"The tenant mix in Hollywood is mostly a smaller, service-type of business, where the market stays a little bit more stable," said Brad Shelf, broker with CB Richard Ellis Group.

While much of the leasing activity was done at below-market rates during the quarter, less available space contributed in part to a modest rise in rents. Quoted rates for Class A office space rose to $2.32 per square foot from $2.28 in the first quarter, but were still below the year-ago rate of $2.34.

"Those are not exactly dynamic rents," said Paul Stockwell, broker with Studley.

In West Hollywood, the most interesting activity occurred at the Pacific Design Center, Shelf said. Interpublic Group of Cos., the giant advertising and marketing company, signed one of the biggest deals of the quarter at the building, located at 700 San Vicente Blvd.

The lease, for 145,000 square feet, was signed in May and runs 11 years at a price of $40 million. The first of Interpublic's companies is scheduled to begin moving in next month.

"It is likely that these medium-sized transactions are a reflection of the slow but positive growth of the economy and may portend a pattern," according to a market analysis provided by CB Richard Ellis.

Interpublic plans to move several of its key design and communications units into the center, which consists of more than 1.2 million square feet of office and show space.

Five years ago, Cohen Bros. Realty Corp. of New York paid $165 million for the famous "Blue Whale," a 16-acre jewel of real estate in West Hollywood, and has been renovating and repositioning the center ever since.

"This bodes well for the overall area where it seems as though big ad agencies are finding it as a pretty good place to call home," Shelf said.

Advertising firm Dailey & Associates also is located at the Design Center.

Putting the past behind

An oversupply of office space hit Hollywood when the dot-com bubble burst in 2000, though it was mitigated a bit when the entertainment industry, facing potential strikes by actors and writers, locked some deals when it rushed into production.

But now, John Tronson, principal with Ramsey-Schilling Commercial Real Estate Services Inc., sees demand for office space increasing, though rents remain somewhat flat. "I'm 100 percent confident that we have bottomed out, and that supply is shrinking and demand is increasing," Tronson said.

He also sees retail improving in Hollywood. Longs Drugs recently signed a 10-year lease for 20,000 square feet in the Hollywood Galaxy at 7045 Hollywood Blvd.

The slow growth in demand for office space has confounded some.

For instance, developer Paladin Realty Partners once planned to convert the 93,000-square-foot Hollywood Equitable Building into office space. But with 95 percent of the building vacant, he moved to convert the building to residential.

Conversion trend

"Certainly, the big buzz word is condo conversions," said Richard Ringer, senior investment associate with Marcus Millichap in West Los Angeles.

He worries that investors looking to convert properties to condominiums may find the window of opportunity has closed by the time approvals and sale of the condos can take place 12 or 18 months down the road.

"Well, I'm a little more confident in today's market than in 12 to 18 months out," Ringer said. "I don't think the floor will just drop out, but we are in line for a correction."

One reason for Ringer's caution: a 23-unit complex on Sherbourne Avenue listed at $4.6 million, and a 102-unit complex on Wilcox Avenue listed at $14.5 million have both been on the market for nearly two months. "I'm not getting the same bites that I normally would," he said. "Last year, these two properties would have flown off the shelf. What I'm seeing now is smart money on the sidelines waiting to see what happens."

Major Events:

* Interpublic Group of Cos. leased 145,000 square feet of space at the Pacific Design Center, located at 700 San Vicente Blvd., over an 11-year period for $40 million.

* Sausalito-based Montgomery Partners Inc. purchased a 64-unit building at 1764 N. Sycamore Drive in Hollywood for nearly $6.5 million.

* American Apparel Inc. plans to lease space at a Hollywood retail strip being redeveloped by CIM 6roup Inc. The L.A.-based apparel manufacturer plans to open a storefront in the Hollywood Cherokee site at 6611-6637 Hollywood Blvd.

* Longs Drugs signed a 10-year lease for 20,000 square feet in the Hollywood Galaxy at 7045 Hollywood Blvd.